Wealth Management
Retirement is a rising concern for many Americans, and that concern is only amplifying with one of the largest retirement populations—social security—being funded by a much smaller cohort of funders. About half of the population is concerned they will out-live their savings, and that’s justified given average life expectancy is almost 20 years longer than retirement. However, the 2019 Secure Act is opening new doors in retirement investing, annuities, by relieving employers legal liability for annuities. Rather than the typical safe assets like bonds that slowly integrate into the portfolio as one nears retirement, companies like BlackRock will also fund annuities. They aim to allocate 10% of your funds by the age 55 and take that share to nearly 1/3rd by retirement age. These annuities typically come with a fixed rate of return on the principle and these integrated 401k plans will become available starting in 2022.
FINSUM: Annuities can definitely bridge the gap for those skeptical that social security will fill their cup, but they still come with plenty of risk despite the ‘guaranteed’ income many might expect.
Direct Indexing is the process of holding the stocks in the weights of the underlying Index, rather than buying an ETF that tracks an index, and this new opportunity is being adopted by financial heavyweight Charles Schwab and will be available to investors. Starting with the large-cap Schwab 1000 Index, S&P Small Cap 600 Index and MSCI KLD 400 Social Index, Schwab will be available to mix and match to customize a portfolio to hit the investor’s exact needs. However, this option won’t be available to just any investor. The indexing platform will require a $100,000 account size. Adoption of direct index investing is one piece of Schwab’s expansion into personal investing, that goes hand-in-hand with environmental, social, and governance investing and other thematic investing.
FINSUM: Schwab is the latest of Vanguard, Fidelity, BlackRock and Morgan Stanley to jump into index investing. However, Schwab’s pricing format is not revealed and its advantages over a low fee ETF are not yet clear.
(Washington)
Financial advisors have been highly focused on the prospect of the Biden Administration imposing a new capital gains tax rate. In particular, the abolition of the “step-up in basis” at death that inheritors currently benefit from. The popular parlance that has emerged in the industry is “death tax”. Clients generally hate this new proposal, but one of the underappreciated risks is the major liquidity risk that the rule presents. On many assets, capital gains taxes could be large—and take a large amount of cash to pay, cash that many inheritors may not have.
FINSUM: One typical example is on US farms, where land has become hugely valuable over time, but where the actual farming business runs on slim margins. This means inheritors may have high wealth in terms of assets, but little liquidity, creating a significant tax debt under Biden’s proposals.
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(Washington)
The SEC’s Investor Advocate has pointed out that Reg BI is under threat. Some of the developments in the market have meant that Reg BI may be rendered useless. In particular, the increasing use of “nudges” in trading inevitably rubs against the fundamental meaning of Reg BI. If trading platforms for retail investors are constantly using “nudges”, or encouragements to trade, how much does that constitute a recommendation? That is the esoteric question that the SEC must address. According to the SEC’s Investor Advocate, Rick Fleming, “In my view, it appears that the use of certain DEPs, by gamifying securities trading for retail customers, could significantly influence these retail customers’ investment decisions in ways that were not fully contemplated when the commission adopted Reg BI with its important distinction between solicited and unsolicited trading.
FINSUM: Reg BI is only a couple years old and it is already antiquated!
(Washington)
Advisors have been paying very close attention to Reg BI. This is especially true because the Biden administration looks poised to make a number of changes to the rule, including defining “fiduciary” and bolstering enforcement. However, that appears to not be all as the SEC may be set to make an addition to Reg BI: a new section covering the gamification of trading. The SEC’s Investor Advocate, Rick Fleming, says that “N]ow it seems that most if not all of the on-line discount brokers are influencing investor behavior with digital engagement practices, which further blurs the line between providing investment advice and traditional brokerage service … At some point, if the Commission fails to brighten the distinction between advisors and brokers, it will make little sense to regulate the two with such distinct regulatory models.”.
FINSUM: Critical changes to definitions, much heavier enforcement looming, and now a pandora’s box on gamification. And this might be just the beginning.
(Washington)
Joe Biden has picked Lisa Gomez to head the Employee Benefits Security Administration at the Department of Labor. And speaking to senators this week, she made a comment which clearly signals the direction of the Department. She said “there’s nothing that is more central to ERISA than defining who is a fiduciary”. Speaking about her pending work for the DOL, she said she plans “to be briefed on the efforts of looking at the definition of a fiduciary in different contexts, and taking another look at the conflict of interest rule and how it would apply in different situations”. She continued “Determining exactly who is a fiduciary in different contexts … has been the source of disagreement and it’s been a long road to get there”.
FINSUM: The writing is on the wall at the DOL and SEC. The Biden administration is starting to flex its muscle and will beef up regulation.